Gold Price to Recover if Fed Rate Hike Risk & USD Strength Ebb

Gold price action plunged -5.9% last week and now trades back in the red year-to-date XAU/USD was strongarmed lower by a US Dollar squeeze thanks to fresh Fed taper fears The precious metal might rebound higher off support as the FOMC downplays rate hike risk

Gold and silver prices extended their post-FOMC nosedives throughout last week. The precious metals dropped -5.9% and -7.7% respectively. Selling pressure across XAU/USD and XAG/USD largely followed the huge influx of US Dollar strength in response to the Federal Reserve bringing forward its taper timeline.

Specifically, the latest Fed dot plot revealed that central bank officials see two interest rate hikes by the end of 2023. This compares to market expectations only looking for one rate hike in 2023 and the prior dot plot that showed less than half of FOMC officials penciling in rate increases by year-end 2023. In light of Fed Chair Powell downplaying the significance of the dot plot, however, there seems to be potential for gold price action to claw back recent downside.

Not to mention, nearby support at the $1,765-price level stands out as noteworthy technical barrier that gold bulls might look to defend. Below this technical support zone resides a long-term ascending trendline in addition to the $1,675-price level, which is underpinned by the bottom Bollinger Band and year-to-date lows.

XAU/USD – GOLD PRICE CHART: WEEKLY TIME FRAME (NOVEMBER 2019 TO JUNE 2021)

US Dollar Forecast: Fed Offers Best Week in Months

US Dollar gains most against ASEAN currencies in about 15 months Fed projected 2 rate hikes by the end of 2023, 2-year bond yields rose

The US Dollar not only saw its best weekly performance in about 15 months against its major peers, but that strength also dominoed into emerging APAC markets, including ASEAN. On the chart below, my ASEAN-based US Dollar index soared to its highest since early April. That was also its best weekly gain in roughly 15 months, could this be a meaningful shift in trend?

This follows the Federal Reserve monetary policy announcement. There, the central bank released updated economic projections and where policymakers see rates going in the long run. The key takeaway was that the central bank seems to see that it could deliver 2 rate hikes by the end of 2023. That was a notable hawkish shift from before, which also entails the possibility of policy tapering arriving sooner than expected.

ASEAN currencies such as the Singapore Dollar, Thai Baht, Indonesian Rupiah and Philippine Peso can at times be sensitive to external event risk, particularly from countries like the United States and China. This is partly due to how economic policy can shift capital flows into and outside of Emerging Markets. Down the road, a Fed that raises rates and tapers policy could send investors slowly away from riskier opportunities.

A stronger US Dollar, coupled with rising benchmark lending rates from the world’s largest economy, could make it more difficult for emerging APAC markets to repay foreign debt. When market sentiment sours, as it did to a certain extent after the Fed, traders also tend to preserve their capital. US government bonds and dollars often end up being a go-to choice for them.

ASEAN-BASED USD INDEX VERSUS EEM – DAILY CHART

NZD/USD Rebound May Extend on Q2

The New Zealand Dollar rebounded overnight against the US Dollar, ending a multi-day drop in NZD/USD following the Greenback’s FOMC-induced surge. The Westpac McDermott Miller consumer confidence index jumped to 107.1 in the second quarter, up from the Q1 figure of 105.2, according to the DailyFX Economic Calendar. Despite the jump, the index remains below its long-run average. Optimism is running high for the island country as the world makes progress against the pandemic, which will open New Zealand’s economy back up to tourists’ dollars.

Equity markets across the Asia-Pacific region sold off to start the week, with Japan’s Nikkei 225 index putting in a 3.29% drop. Tuesday’s session may fare better following a rebound on Wall Street in Monday’s New York trading session when the benchmark S&P 500 index gained 1.40%. Crude oil prices rose overnight as talks between the United States and Iran continued with little progress.

Markets are still weighing the implications of the Fed’s accelerated timeline on tightening policy. That said, traders may not be too keen to dive back into risk assets just yet. While the risk-sensitive US Dollar pulled back after a big run following the Fed rate decision last week, the Greenback remains near a multi-month high via the DXY index.

NZD/USD DAILY CHART

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